Blogs & Comment

Where is Paul Martin when you need him?

Debt fears engender nostalgia for the good old days—of the Liberals.

Then federal Finance Minister Paul Martin listens to a presentation during a pre-budget conference on Jan. 22, 1993 in Montreal (Photo: Paul Chiasson/CP)

Where is Paul Martin when you need him? Mr. Martin, as you may recall, was the Minister of Finance who led a turnaround in the finances of the federal government from the mid-1990s to the mid-2000s.

What we need right now is another guy like him because the Conservatives’ commitment to balance the budget by 2015-16 is not credible. And their current laxity on the fiscal front (in the first year of a majority government no less) will likely give way to a period similar to the 1980s when chronic deficits and ever-increasing government debt resulted in a fiscal crisis by the early 1990s.

That, in a nutshell, is the main message in Learning from the Past: How Canadian Fiscal Policies of the 1990s Can Be Applied Today, a new study published by the Fraser Institute. Take note, Stephen Harper and Co.: If a right-wing think tank looks back with nostalgia on the years when Mr. Martin’s Liberals were in power, chances are the whole of the Canada’s conservative constituency (of which I am one) is growing disillusioned with the current stance on government spending and finances.

Earlier this year, the Conservatives had called for a balanced budget by 2014-15. But this was based on the Panglossian view that economic activity would generate average annual growth in government revenues of 5.6%. The Conservatives’ recent Economic Update pushed back the target date to 2015-16 after trimming—though not by much—some of the overly optimistic growth assumptions.

If the Feds are truly serious about meeting deficit targets, they have to do more than simply slow growth in federal spending to 2% a year, as currently planned. They must, declare the Fraser Institute and other observers, bring about an absolute reduction in government spending, as Mr. Martin did.

Even if the government’s projected growth and spending rates are achieved, they likely will not balance the budget by 2015-16. Peter Devries, a former director of fiscal policy at the Finance Department, writes on that no measures have been announced in previous budgets to explain the large declines in transfer payments shown in government estimates beyond 2012-13. Plus, there is a rather unrealistic assumption for spending in the “Other Operating Expenses” category.

Spending cuts are what should be happening anyway at this stage, if Keynesian precepts are to be followed. The Feds cushioned the downturn of 2008 and 2009 by boosting spending through deficit financing. But they are now failing to act on the other half of John Maynard Keynes’ prescription, which is for governments to move back into a surplus position and pay back the debt taken on during the previous period of deficit financing. It’s this basic failure to implement the second half of Keynesianism that has culminated in the current fiscal crises in the U.S., Europe and other developed countries.

Some may say it’s too soon to get serious about reining in government spending given lingering concerns about the global economy. Parliamentary Budget Officer Kevin Page argues we don’t have that luxury. His 2011 Fiscal Sustainability Report, released at the end of September, points out that Canada’s aging population in itself seriously endangers the future sustainability of Federal finances. The growing ranks of retirees entail lower tax revenues and greater expenditures on senior’s benefits and health care.

Canada’s Looming Fiscal Squeeze, a November 3 study released by the Macdonald-Laurier Institute, reinforces this view and estimates that the consequent fiscal challenge implies deficits for decades to come. Indeed, the study’s author, Professor Christopher Ragan, estimates that “total government spending as a share of the economy will gradually rise well above tax revenues so that by 2040 the deficit would be 4.2 percent of GDP.”

Ragan ran simulations of increases in immigration rates, labour-force participation, fertility rates, and productivity growth, along with restraint in the growth of healthcare and other age-related spending. Ragan’s growth and spending projections reduced only the size of the deficits. “Given the magnitude of the problem,” Ragan concludes, “governments will either act proactively and methodically now, or reactively, in crisis later.”